The Impact of Tax-Benefit Reforms on Labor Supply in a Simulated Nash-bargaining Framework

Several theoretical contributions have suggested to model household behavior as a Nash-bargaining game. Yet very few attempts have been made to operationalize cooperative models of labor supply for policy analysis. In this paper, we implement a Nash-bargaining model with external threat points (divorce) into the microsimulation of tax-benefit policy reforms in France. The observation of divorced individuals is used to predict outside options and (some) of the preferences for individuals living in couples. Benchmark simulations are conducted in a way that guarantees consistency with the Nash bargaining setting, regularity conditions and observed behavior. We examine how the labor supply of couples adjusts to shocks on threat points, either hypothetical or generated by a radical tax-benefit reform.     

How does inequality aversion affect inequality and redistribution?

We investigate the effects of inequality aversion on equilibrium labor supply, tax revenue, income inequality, and median voter outcomes in a society where agents have heterogeneous skill levels. These outcomes are compared to those which result from the behavior of selfish agents. A variant of Fehr-Schmidt preferences is employed that allows the externality from agents who are “ahead” to differ in magnitude from the externality from those who are “behind” in the income distribution. We find first, that inequality-averse preferences yield distributional outcomes that are analogous to tax-transfer schemes with selfish agents, and may either increase or decrease average consumption. Second, in a society of inequality-averse agents, a linear income tax can be welfare-enhancing. Third, inequality-averse preferences can lead to less redistribution at any given tax, with low-wage agents receiving smaller net subsidies and/or high-wage individuals paying less in net taxes. Finally, an inequality-averse median voter may prefer higher redistribution even if it means less utility from own consumption and leisure.     

Collective Models of Labor Supply with Nonconvex Budget Sets and Nonparticipation: A Calibration Approach

We suggest a methodology to calibrate a collective model with household-specific bargaining rules and marriage-specific preferences that incorporate leisure externalities. The empirical identification relies on the assumption that some aspects of individual preferences remain the same after marriage, so that estimation on single individuals can be used. The procedure maps the complete Pareto frontier of each household in the dataset and we define alternative measures of a power index. The latter is then regressed on relevant bargaining factors, including a set of variables retracing the potential relative contributions of the spouses to household disposable income. In its capacity to handle complex budget sets and labor force participation decisions of both spouses, this framework allows the comparison of unitary and collective predictions of labor supply reactions and welfare changes entailed by fiscal reforms in a realistic setting (see Michal Myck et al., 2006; Denis Beninger et al., 2006).

RISK PREFERENCES AND EXPECTED UTILITY: EVIDENCE FROM LABOR SUPPLY DATA

This paper adds to the growing body of evidence that observed risk preferences are not consistent with expected‐utility theory. Using the link between labor supply decisions and utility as outlined by Chetty (“A Bound on Risk Aversion Using Labor Supply Elasticities.” The American Economic Review, 96(5), 2006, 1821–34), I compute the curvature of utility over wealth for 3,900 individuals in the 1996 Panel Study of Income Dynamics. I then compare this estimate to a measure of relative risk aversion based on the respondents' answers to hypothetical gambling questions and find virtually zero correlation. Finally, I investigate how the two measures and their correlations change by demographic groups and risky behavior. (JEL C81, D80, J22)     

A Stochastic Monopsony Theory of the Business Cycle

Two distinct regimes, contractions and expansions, are generated in a model in which goods markets clear and all individuals are optimizing, strict wage and price takers, have fully rational expectations, and are heterogeneous in both preferences and resource endowments. Involuntary unemployment, asymmetric monetary policy effectiveness, and a changing relationship between real wages and employment over the business cycle are the result of optimizing behavior by monopsonistic, wage-setting, and price-taking firms faced with price uncertainty, an upward-sloped supply of employees, and efficiency wage behavior. Disequilibrium and involuntary unemployment can occur at the level of the individual firm's labor market.     

Extracting a revised labor supply theory from Becker's model of the household

Conflicting assumptions about labor supply behavior lie at the nexus of ideological and theoretical debates regarding the reality of involuntary unemployment, the efficacy of Keynesian macro-policy, and the appropriate nature of welfare policy. This can in part be attributed to the fact that orthodox theory is effectively predicated upon describing the behavior of individuals whose level of affluence enables them to voluntarily withhold their labor from the market. Ironically, a means of resolution appears if we extend Gary Becker's utility producing model of the household to recognize two latent behavioral concerns: (1) the ‘need’ of households for money income in order to produce utility, and (2) the presence of work activity in the home. The resulting generalized labor supply model extends Becker's analysis to explicitly encompass both the behavior of the affluent, and the behavior of the poor who need to work in order to sustain their existence.     

Interfirm wage differentials in a local labor market: The case of the fast-food industry

We examine interfirm wage differentials among fast-food restaurants in Atlanta, Georgia to determine the degree to which these differentials correspond to the predictions of competitive theory. While no definitive test is possible, given our inability to control all sources of wage variation, the evidence nevertheless suggests that the wage structure is largely shaped by competitive forces, albeit in a relatively complex manner due to differences in a host of factors that the simple version of the theory holds constant. Evidence is also found, on the other hand, that the supply curve of labor to the individual firm slopes upward for experienced workers and that a small noncompensating wage differential may exist that is related to variation in each restaurant's ability to pay.     

Nationality and Income Attainment among Native and Immigrant Hispanic Men in the United States*

This study examines earnings inequality between Hispanic-origin men and non-Hispanic white men (referred to as white) using the 1976 Survey of Income and Education. Results show that human capital and labor supply variables have more impact on Hispanic earnings than labor market characteristics. Post-school job experience and weeks worked conform most consistently to the predictions of micro-economic labor theory. Formal schooling, while positively related to earnings, does not uniformly influence job rewards among Hispanic-origin groups. Ecological variables (social and economic organization) of the labor market have less impact on earnings. There is some evidence that whites benefit from the presence of large concentrations of minority workers, while two Hispanic groups—native Mexican and other Spanish men—are negatively affected by high concentrations of Hispanic workers. A composition analysis shows that from 10 to 50 percent of the earnings gap between Hispanic and white men may be attributable to discrimination.     

The demand for leisure time in the presence of constrained work hours

This article presents a labor supply model designed to address situations of overemployment or underemployment in the labor market. Previous labor supply models have taken the possibility of work hour constraints into consideration but typically assumed that the existence of fixed work hours only influenced the decision of labor force participation. This ignores situations in which individuals choose to be employed at fixed-hour jobs even though these jobs do not offer the desired work hours.     

SOURCES OF ORGANIZATIONAL COMMITMENT: THE EFFECTS OF INTERNAL LABOR MARKETS AND WORKER VALUES

Data from the 1991 General Social Survey and National Organizations Survey are used to assess how organizational commitment is structured by one “demand side,” organizational-based factor, firm internal labor markets, and one “supply side,” individual-based factor, the values/preferences of workers. Findings indicate that organizational commitment is best explained by the joint influence of these two factors rather than by their independent effects. Specifically, firms with internal labor markets are conducive to the development of high levels of organizational commitment to the extent that what they offer, namely, opportunities for career-status and long-term employment “fit” what workers desire: job security and possibilities for promotion with their current employer. We offer directions for future research that may shed additional light on the manner in which internal labor markets and the values/preferences of workers may structure organizational commitment.     

WHOSE PREFERENCES ARE REVEALED IN HOURS OF WORK?

It has become orthodox in economics research to interpret the association between hourly earnings and working hours as the expression of the preferences of workers. This convention originated in H. Gregg Lewis' explanation for the decline in hours of work since the nineteenth century. His explanation rested on an explicit resolution of the identification problem inherent in any quantity (hours)–price (wage) relation. For over 40 years, researchers have neglected this identification problem with the result that the findings in the purported “labor supply” literature are of questionable value. (JEL J22, J23, C13)     

Interpersonal risk assessment and social preferences: An experimental study

We investigate interpersonal risk assessment, that is how individuals use either their own or their partner’s monetary resources to offset the risk that affects them or their partner. The observed behavior is in line with the predictions of a simple piecewise linear model of social preferences. Overall, individuals opportunistically draw from others’ resources to offset risk; furthermore, they display higher levels of risk aversion when delegated to choose for others rather than when choosing for themselves. However, different social types differ in the assessment of interpersonal risk. Considering our results, we suggest that studies dealing with interpersonal risk assessment should not only focus on risk preferences, but also take into account social preferences.     

Tax reform and endogenous gender bargaining power

The conventional studies with unitary representation of the household have been seeking for the condition in which tax systems achieve improvements of both fertility and female labor supply. Such analyses may not be enough to capture the important aspects of family behaviors since their common-preference assumption is frequently inconsistent with observed economies. By making use of a family bargaining framework, we argue that the heterogeneity in parental preferences among household members influences the result of existing studies on tax systems. Our results show that when women prefer larger family size than men, the tax reform towards individual taxation raises the fertility rate even more. In this case, female labor supply can be still increased in spite of enhanced fertility due to bargaining allocation.     

Jacob Mincer and Labor Supply–Before and Aftermath

This paper discusses the impact that Jacob Mincer's 1962 paper Labor-Force Participation of Married Women... had on the analysis and empirical estimation of the labor supply of married women, and the supply of labor in general. It is argued that this paper has revolutionized the analysis of labor supply. The sharp increase in married women's labor supply still constitutes a challenge to labor economists who try to explain the phenomenon in terms of income and price effects derived from cross-section studies. It constituted a puzzle to labor economists in the 1950s and 1960s, still captives of the notion of a backwards-bending supply of labor. Mincer combined a theoretical model distinguishing between three uses of time (leisure, work at home, and work in the market) and Friedman's distinction between permanent and transitory earning. He showed that the wage has a positive effect on married women's labor supply, and that this supply is more affected by transitory than by permanent income changes. The new theory serves as the scaffold on which Mincer builds the empirical estimation. The interplay between theory, data, and empirical estimation, and the ingenuity of the empirical research using scant data sources, made this paper the object of emulation. The ideas first discussed in this paper generated many of the developments in the analysis of labor supply witnessed over the last four decades.     

Will the possibility of divorce discourage marriage-specific investment?

Becker et al. (1977) argue that the possibility of divorce discourages the accumulation of marriage-specific capital. Their argument has been confirmed by empirical studies that assume labor supply and marriage-specific investment are negatively related. We argue that since it is possible for individuals to increase marriage-specific investment without changing labor supply simultaneously, the conventional approach using the change in labor supply to infer to the change in marriage-specific investment may lead to a biased conclusion. This paper incorporates dynamic and stochastic optimal control approach into a material-spiritual goods framework. The model disentangles marriage-specific investment form other marital effort, and demonstrates that only part of effort devoted to marriage is marriage-specific investment and only the individuals who have spiritual and emotional needs make marriage-specific investment. Marriage-specific investment is highest in marriages where individuals behave altruistically, lower in marriages where individuals behave selfishly, and zero in marriages where spiritual goods are not valued. The model also implies a result that is contrary to conventional wisdom: the possibility of divorce does not always discourage, and may even encourage, marriage-specific investment. Since the impact of the divorce risk on marriage-specific investment depends on three factors: time preference, the level of the risk and the correlation between the divorce risk and marriage-specific capital, it could be optimal for an individual to invest more under uncertainty than in the corresponding risk-free world if he or she can well understand and predict his or her partner's spiritual needs. The key factor in the decision process is the confidence in predicting the partner's spiritual needs.     

Economic analysis of volunteers’ motivations—A cross-country study

While some core theories on volunteer labor supply decisions can be found in the economic literature, little efforts were made so far to operationalize these models and verify their implications in an empirical context. This paper aims at narrowing the research gap between the theoretical economic literature on volunteer motivations and the empirically observed motivations for volunteer labor supply. A common indicator ‘voluntary contributions by others’ linking the theories of public goods, private consumption and investment has been identified and examined on the basis of structural equation modeling and regression analysis. Using representative micro data collected for volunteers in Bangladesh, Ghana, Poland and South Korea, the paper finds that this indicator significantly influences an individual's motivation. Particularly, observed findings are in accordance with theoretical predictions.     

DO LABOR MARKETS PROVIDE ENOUGH SHORT-HOUR JOBS? AN ANALYSIS OF WORK HOURS AND WORK INCENTIVES

This paper examines the role that work incentives play in the determination of work hours. We use a conventional efficiency wage model to analyze how firms respond to worker preferences regarding wage-hours packages. In contrast to previous work, we study markets in which workers have heterogeneous preferences. In this context we demonstrate that job offers will specify both wages and work hours and many individuals will not be able to work their preferred number of hours. We show that the labor market equilibrium may be characterized by a less than optimal number of short-hour jobs.     

Are Risk Attitudes Fixed Factors or Fleeting Feelings?

We investigate the stability of measured risk attitudes over time, using a 13-year longitudinal sample of individuals in the National Longitudinal Survey of Youth 1979. We find that an individual’s risk aversion changes systematically in response to personal economic circumstances. Risk aversion increases with lengthening spells of employment and time out of labor force, and decreases with lengthening unemployment spells. However, the most important result is that the majority of the variation in risk aversion is due to changes in measured individual tastes over time and not to variation across individuals. These findings that measured risk preferences are endogenous and subject to substantial measurement errors suggest caution in interpreting coefficients in models relying on contemporaneous, one-time measures of risk preferences.     

Negatively interdependent preferences

We develop a theory of representation of interdependent preferences that reflect the widely acknowledged phenomenon of keeping up with the Joneses (i.e. of those preferences which maintain that well-being depend on “relative standing” in the society as well as on material consumption). The principal ingredient of our analysis is the assumption that individuals desire to occupy a (subjectively) better position than their peers. This is quite a primitive starting point in that it does not give any reference to what is actually regarded as “status” in the society. We call this basic postulate negative interdependence, and study its implications. In particular, combining this assumption with some other basic postulates that are widely used in a number of other branches of the theory of individual choice, we axiomatize the relative income hypothesis, and obtain an operational representation of interdependent preferences. Received: 7 December 1998/Accepted: 24 August 1999     

A dynamic model of public sector employer response to unionization

We model the response of public sector employers to unionization using the response of public school boards to teacher unionization as an example. While it is generally believed that public sector employers pay unionized workers more than nonunion workers, there is less consensus about where the money comes from. We model two cases which are possible employer reactions to unionization: re-allocating resources among types of expenditures and modifying the way in which services are provided. The model contains a political equilibrium that determines the union’s preferences and an economic equilibrium that reflects labor market conditions. We compare the predictions of the two cases regarding the effect of unionization on wages, turnover, allocation of expenditures, and productivity. We interpret existing empirical research on public sector unionization in light of these predictions and make recommenda-tions for future empirical work.